Market Expectations for 2011

My inbox has been filled with various reports and expectations of what might happen as a result of the floods around the country and their impact on the share markets.  He is my adaptation of what has come across my desk from the research analysts at Macquarie Equities, Goldman Sachs and Citigroup research.  This is purely my view and does not imply any real or expected returns from the markets.

Natural Disaster

The floods are likely to have implications for Gross Domestic Product (GDP) growth, inflation and personal finances here in Australia.

Production will be severely affected among coal and agricultural producers, while the retail and tourism sectors will also be adversely affected.  (I have heard reports from clients who have just been to Cairns and people have cancelled travel due to concerns with the floods, they received fantastic service while away but it will definitely have a short term impact.  I am pleased to say the SPAA conference to be held in Brisbane in February 2011 (which I am attending as a SMSF professional delegate) is still set to proceed so I would suggest if people support the areas that have been effected minimal impact will result long term.

While it is difficult to assess the full impact at this early stage, the analysts believe it will be unlikely to be significant changes to the calendar year 2011 growth outlook, given that government spending and rebuilding work will likely add to growth later in the year.

Interest Rates – Reserve Bank of Australia

Sharp rises in food prices (if/when they occur) and increased spending for rebuilding work will place upward pressure on inflation, but the Reserve Bank should look-through these one-off price spikes and it is my personal belief that interest rates will remain on hold for the first part of the year with most analyst tipping that rates will only go up by 0.25% by the end of 2011.

Effect on the Australian Federal Government Budget

The Queensland and Commonwealth Governments’ fiscal positions would deteriorate as a result of the floods, other things equal.  Direct assistance for the flood victims will show up on the expenditure side of the ledger. Probably more importantly for government accounts, will be the need for substantial expenditure to fix the infrastructure, or rebuild it, damaged or destroyed by the floods.

The Prime Minister has insisted she will deliver the projected surplus of $3.1bn (0.2% of GDP) in 2012-13, which implies cuts elsewhere.

The view by Analysts is that there is plenty of room for cuts in the Commonwealth Budget to achieve the surplus by 2012-13.

Australia Dollar

We have seen the Australian Dollar reduce (following the floods in Brisbane some believe this was due to the minute by minute coverage by media in London, USA and abroad) but has since return to above parity (overnight last night 20th January).  I think we will still have some ongoing strength in the Australian Dollar until atleast the end of 2011 (based on the continued borrowing which are happening in the US and the relative strength of the Australian Economy compared to the rest of the world).

Expectation for the Market

The resource sector and energy sector theme and story is still current within our markets as is the theme around industry stocks continuing to recover.

Most analysts are predicting a return in the mid to high 10%’s for the calendar year to end of 2011.  Goldman Sachs is predicting the market will close at 5600 which would represent a return of 17% for the year.  I am still a little more cautious with my expectations (and yours) with my view being a overall return of 10 -15% for the year taking at around 5300 – 5400 (which is the market above the 5000 point mark which seems to still be the spook for many we did reach it a one point in calendar year 2010).

Still there are opportunities present for investors who are happy to buy a concentrated portfolio of quality blue chip stocks.